The special defense contribution is a separate tax imposed by Law 117(I)/2002, as amended, to enhance the defense capacity of the Republic. Among the persons who are obliged to pay the special defense contribution are the shareholders of a company who are residents in the Republic, at a rate of 17% on the amount of the dividend they receive or are deemed to receive from the company. That is why the company must, at the end of the two years following the tax year in which it made profits, pay the special defense contribution, regardless of whether or not it distributed the profits as dividends to its shareholders. The option to distribute the profits as dividends to the shareholders concerns the company itself, but it is deemed that it has distributed 70% of its profits acquired or incurred in the tax year, after deducting the corporate tax which was paid or is payable on these profits. According to the amendment brought by Law 132(I)/2010, the term “corporate tax” includes the special defense contribution, the capital gains tax and any amount of foreign tax that is not credited against the income tax and or against the special defense contribution for the year in which they are due.

The relevant provision for this tax is found in article 3(3) of the Law which provides that any special defense contribution payable by a shareholder as a consequence of a deemed dividend distribution is payable primarily by the company, which will charge such a contribution to the shareholders. In case of non-payment, the company is responsible, being the one that made the profits, to pay the special defense contribution on the deemed distribution of dividends of 70% of its profits. If the company disagrees with a decision of the Director of the Inland Revenue Department for the deemed dividend distribution, only the company itself can object and file a recourse before the Administrative Court.

The Supreme Court in a judgment issued on 20.7.2021 in the context of the Review Appeal No 173/2014 examined the appeal of a company against a first instance judgment that rejected the recourse against the special defense contribution on the deemed distribution of dividends for the profits made from the sale of its immovable property, which had been taxed with capital gains tax before the amendment of the Law. The company claimed that it was subject to double taxation, that the capital gains resulting from the disposal of immovable property were part of its accounting profits and that the capital gains tax it paid was not deducted. Moreover, it claimed that it had not distributed the profits and the persons accountable to pay the special defense contribution were its shareholders when they received the dividends.

The Supreme Court in its judgment stressed that the Court of first instance correctly pointed out that Law 117(I)/2002 refers to “deemed distribution of dividend” on accounting profits, which are not affected by offsetting losses, as well as from any amounts, including additional depreciation arising from or as a result of revaluation of movable and immovable assets. It added that according to article 3(3) of the Law, the obligation of a company to pay the special defense contribution for the deemed distribution of its accounting profits, in the form of a dividend to its shareholders, is independent of the way the company’s profits have been used and from the payment of a real dividend.

The Court pointed out that the Law provides for the payment of the special defense contribution in respect of a deemed dividend and not a real one in relation to accounting profits which are deemed to have been distributed to the shareholders. It is the company that has the obligation primarily bot for the submission to the Director of the relevant declaration of the deemed dividend and for the payment of the special defense contribution according to the declaration. It stated, however, that in this case article 3(3) of the Law applied as it had before its amendment, i.e. before the addition of the reservation which explicitly included in the term “corporate tax” and the capital gains tax. Under the circumstances, it did not constitute double taxation of the same profit, since the company was subject to capital gains tax for the sale of its immovable property, while the disputed special defense contribution was charged to its shareholders on the basis of the deemed dividend distribution. Consequently, applying the law in force before its amendment, the Supreme Court dismissed the appeal.